Thursday, 21 August 2014

Financial Sector in India

Financial sector plays a vital role in any economy particularly emerging economies like India which
Photo source: IMARTICUS
needs to harness its full potential. Indian financial sector is in early stage of evolving on an inclusive financial system keeping in view of the aspirations of the billion plus people in the country. Banking sector is an indispensable organ of the financial sector for servicing various intermediations. The efficient intermediation of financial system among people enables to achieve higher economic and social development.

Since the economic reforms process which began in 1991, the nature of financial intermediation has undergone several transformation with other intermediaries such as the Non-Banking Financial Companies (NBFCs), insurance, pension funds and mutual funds emerging as the new mechanisms for channelizing savings to investments in the country. Besides, there are other forms of financial intermediation which emerged during in the process of systemic reforms including equity and debt markets, financial products like forwards, futures and other derivatives instruments which have the capacity of reallocating capital to more efficient use in the economy.

Over the years in the process, Indian financial system has also become more integrated with the global economy as well as global financial systems. Keeping this in view, India’s growing integration of financial services in terms of vertical as well as horizontal linkages both in domestic and globally need to be backed up with effective regulatory mechanism which keeps track and addresses the vulnerabilities of external and internal in nature. One of the major modes of financial transactions is banking as financial intermediaries that collect deposits from savers and lend them to investors and others. The deposits of banks form the basis of their lending operations. Banks also use the deposits for advancing credit or for making investment in government and other securities.

The prospect’s of growth of an economy depends on the foundation of the financial sector’s soundness and resilience. One of the core indicators of the financial soundness is the status and magnitude of the non-performing assets (NPAs) in the banking system. The NPA is also an important indicator for assessment of an economy’s financial prudence and creditability for future investments.

According to the latest Economic Survey 2013-2014:

·        Overall NPAs of the banking sector increased to 3.90% of total credit advanced in March 2014 (provisional) from 2.36% of total credit advanced in March 2011. While there has been an across-the-board increase in NPAs, the increase has been particularly sharp for the infrastructure sector, with NPAs as a percentage of credit advanced increased to 8.22% as in March 2014 (provisional) from 3.23% in March 2011. Because of the slowdown and high levels of leverage, some industry and infrastructure sectors, namely textiles, chemicals, iron and steel, food processing, construction, and telecommunication are experiencing a rise in NPAs.

·        Further, during 2012-13, the deteriorating asset quality of the banking sector emerged as a major concern, with gross NPAs of banks registering a sharp increase. The gross NPAs to gross advances ratio shot up to 3.6% in 2012-13 from 3.1% during the corresponding period of the previous year. The deterioration in asset quality was most perceptible for the State Bank of India (SBI) Group with its NPA ratio reaching a high of 5% at end March 2013. With their gross non-performing assets (GNPA) ratio reaching about 3.6% by end March 2013, the nationalized banks were positioned next to the SBI group.

·        The Gross NPAs (GNPAs) of public-sector banks (PSBs) have shown a rising trend, increasing by almost four times from March 2010 (Rs.59,972 crore) to March 2014 (Rs.2,04,249 crore) (provisional). As a percentage of credit advanced, NPAs were at 4.4% in March 2014 (provisional) compared to 2.09% in 2008-09.

However, it is striking to note that the former Deputy Governor of RBI, Shri  K.C.Chakrabarty, who had pointed out that “Economic slowdown and global meltdown are not the primary reason for creation of stressed assets but the state of credit and recovery administration in the system involving banks, borrowers, policy makers, regulators and legal system have contributed significantly to the present state of affairs”.

The rising of NPAs across different segments of banking system is not at all welcome trends and thus requires adequate continuous assessment and monitoring system has to be put in place to keep the financial system vibrantly free from adverse risks. Therefore, the need of the hour is to reform the existing regulatory machinery including Corporate Debt Restructuring (CDR) mechanism, Debt Recovery Tribunals (DRTs) & other legal provisions, Asset Reconstruction Companies (ARCs) and Credit Information Companies (CICs).


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